A guide to individual voluntary arrangements
Introduction
A voluntary arrangement for individuals in England and Wales
is a procedure whereby a scheme of arrangement, usually involving delayed or
reduced payment of debts, is put forward to creditors. Such a scheme requires
the approval of the court, and is under the control of a supervisor. Provisions
for similar procedures exist in Northern Ireland and Scotland, which are
discussed in more detail below.
Prior to the introduction of voluntary arrangements in 1986,
an individual who was unable to pay his creditors might attempt to ignore the
situation and hope that no creditor raised a petition for his bankruptcy. Other
than taking matters into his own hands and filing for his own bankruptcy the
only course of action open to a debtor was contained in the Deeds of Arrangement
Act 1914. This allowed a debtor to come to an arrangement with his creditors
based on reduced or delayed debt repayments but did not prevent a dissenting
creditor petitioning for the debtor’s bankruptcy. As a result, such
arrangements came to be used less and less frequently. The provisions relating
to the more effective and legally binding system of individual voluntary
arrangements are now to be found in the Insolvency Act 1986.
Interim order
If protection from hostile creditors is needed an application
is made to the Court for an interim order. The application may be made by the
debtor or, if the debtor is an undischarged bankrupt, either by the debtor, the
trustee of his estate or the Official Receiver. The purpose of the interim
order is to protect the debtor’s property while the proposal is being
considered. During the period after the application is submitted the Court may
stay any legal processes against the debtor and, if the debtor is an
undischarged bankrupt, an interim order may contain provisions for the conduct
of the bankruptcy.
The Court will grant an interim order only if it is
satisfied that the debtor intends to submit a proposal to his creditors and
that, on the day of making the application, he was an undischarged bankrupt or
was in a position to petition for his own bankruptcy. An order will not be
granted if the debtor has made a similar application within the previous 12
months. It is not necessary at this stage for the proposal to be set out in
detail but in many cases the proposal is prepared before the application for the
interim order is made.
Once an interim order has been granted, the debtor is
protected from bankruptcy petitions and, unless the Court gives leave, no other
legal action may be commenced or continued against the debtor. Unless the
nominee or the debtor applies for an extension, the order expires after 14
days.
The proposal
The debtor must prepare a proposal explaining why an
arrangement is desirable and why the creditors may be expected to agree to it.
The proposal is submitted to a ‘nominee’, who must be an insolvency
practitioner, for his consideration and comments. In practice, the nominee will
have assisted in preparing the proposal. The proposal must contain details of
the assets to be included (or excluded) and any assets to be provided by others.
Details must also be given of the nature and amount of the debtor’s liabilities
(noting those guaranteed by others), the extent to which there may be claims
from secured, preferential or associated creditors and the manner in which
claims are proposed to be dealt with. The proposal must also state whether in
the event of bankruptcy, there could be claims relating to transactions at an
undervalue, preferences or extortionate credit transactions.
The proposal must set out the proposed duration of the voluntary
arrangement, when creditors may expect a distribution and how much they may
expect to receive. Estimates of the remuneration and expenses of the nominee
and the supervisor must also be disclosed, together with details of the
supervisor’s role and qualifications. (Once a voluntary arrangement is approved
the person carrying out the function of the nominee becomes known as the
supervisor.)
In addition to the information required to be disclosed by
the insolvency rules the proposal should also include a brief explanation of
the background to the debtor’s predicament and his plans, if any, for the
future. The proposal should be realistic, informative and achievable.
Nominee’s report
The nominee must submit a report to the Court giving his
views as to whether the proposal is worthy of being considered by creditors.
Where an interim order has been made it must be submitted not less than two
days before the interim order expires based on information provided by the
debtor. The report is placed on the Court file and may be inspected at any time
by any creditor. The nominee must state whether, in his opinion, a meeting of
the creditors should be called to consider the proposal and, if so, the date,
time and place of such a meeting. If the Court is satisfied that a meeting
should be held, the period of the interim order will be extended accordingly
but the meeting must take place between 14 and 28 days after the nominee
submits his report. Notice must be sent to all known creditors at least 14 days
before the meeting, accompanied by copies of the proposal and a statement of
affairs (including a list of creditors), the nominee’s comments on the proposal
and a proxy form. Notice of the meeting does not have to be advertised.
Creditors’ meeting
The creditors’ meeting to approve the proposal must be held
at a convenient venue for the creditors between 10.00am and 4.00pm on a
business day and must be chaired by the nominee or his substitute (who must be
suitably experienced).
Creditors are entitled to vote provided written notice of
their claims have been submitted to the chairman either before or at the
meeting. There is no requirement for proxy forms to be submitted prior to the
meeting – they may be taken by the proxy holder to the meeting. Votes are
calculated according to the amount of a creditor’s debt but votes of secured
creditors are calculated on the unsecured part of their debts only.
At the meeting, a resolution to approve or modify the
proposal requires a majority of three-quarters in value of the creditors
present (in person or by proxy) and voting. Other resolutions may be passed by
a simple majority. However, a resolution will be invalid if those who vote
against it include over half in value of the independent creditors, i.e.
creditors who have no connection with the debtor.
The meeting may be adjourned (as many times as may be
required) until the proposal is either accepted or rejected but no adjourned
meeting may be held more than 14 days after the original meeting. The meeting
may approve the proposal as presented, or may approve it with any modifications
as agreed by the debtor (including a change of supervisor). Once the creditors
at the meeting approve the arrangement every person who had notice of and was
entitled to vote at the meeting, whether or not he actually did so, is bound by
the agreement. The meeting cannot, however, affect the rights of secured or
preferential creditors without their consent.
The chairman must prepare a report on the meeting and file a
copy with the Court. He must also inform all those who were given notice of the
meeting whether or not the proposal was accepted, and if so whether it was
modified. If the proposal is approved, the chairman must lodge details of the
arrangement with the Secretary of State for inclusion in a register available
for public inspection.
Challenge of decisions
Within 28 days of the report on the creditors’ meeting being
filed with the Court or in the case of a creditor who only subsequently becomes
aware of the arrangement within 28 days of finding that out an application
challenging the decision may be made either by the debtor, a person entitled to
vote at the meeting, the nominee or any person who has replaced him, or the
trustee of the estate or the Official Receiver if the debtor is an undischarged
bankrupt. The challenge may be made on the grounds that the arrangement
approved at the meeting unfairly prejudices the interest of a creditor or that
there has been some material irregularity at, or in relation to, the meeting.
If the Court upholds the challenge it may give instructions that a further
meeting should be held to consider a revised proposal or that the meeting be
reconvened to hear the original proposal again.
The supervisor
The supervisor takes charge of the assets included in the
voluntary arrangement and takes steps to agree creditors’ claims so that the
proposed distribution may be effected. The supervisor may have other duties
including monitoring progress as set out in the proposal. He is also required
to keep accounts and records of his transactions during the term of the
arrangement. At a maximum of 12 monthly intervals, the supervisor must prepare
a summary of receipts and payments which must be sent, within two months, to
the Court, the debtor and those creditors bound by the arrangement. In addition
to this summary the supervisor must include a report commenting on the progress
made. The supervisor acts under the supervision of the Court and may apply to
the Court for direction on any matter relating to the voluntary arrangement.
Completion of the voluntary arrangement
Once the arrangement has been completed, the supervisor
reports on the implementation of the arrangement and any variation from the
proposal must be explained. The report must also summarise the receipts and payments
made by the supervisor.
Some questions answered
Should a creditor accept the debtors proposal?
Although the Act provides an insolvent individual with the
framework necessary to come to an arrangement with his creditors, there has
been a tendency for some debtors to propose a voluntary arrangement merely to
avoid the stigma of bankruptcy. Upon receiving notice of such a proposal the
creditor should consider the matter very carefully, attend the meeting and
question both the debtor and the nominee thoroughly. If the proposal appears to
be genuine and have a reasonable chance of success, particularly if the return
to creditors is likely to be better than if bankruptcy, a creditor should tend
to be in favour. If, however, it is clear that the proposal is ill founded and
has very little chance of success, a creditor should oppose the arrangement and
petition for bankruptcy.
In practice, voluntary arrangements have failed to gain the
necessary support because creditors believe there may have been fraud or other
irregularities and that the supervisor is powerless to investigate.
What should a creditor ask about the nominee and supervisor?
In assessing the merits of a proposed voluntary arrangement
a creditor should have regard to the professional standing of the nominee and
the extent to which the proposal outlines the duties and responsibilities of
the supervisor. A creditor should be concerned that the arrangement provides
the supervisor with sufficient authority to take appropriate action if the
debtor fails to fulfil his obligations. Experience over the past few years has
shown that there can be difficulties in ensuring that debtors comply with the
terms of the arrangement.
Should creditors form a committee?
The Act does not provide for the formation of a creditors’
committee in relation to an individual voluntary arrangement. As creditors’
committees are widely used in other situations (in liquidations,
administrations and receiverships) to sanction procedures and monitor progress,
the creditors considering a proposed voluntary arrangement may wish to
establish their own informal committee. Such a committee, however, will have
little authority unless agreement can be reached between all parties as to its
powers, duties and responsibilities.
Why and when do voluntary arrangements fail?
Even though a voluntary arrangement receives the necessary
creditors’ approval it may still fail due to the debtor losing interest in the
scheme or refusing to co-operate further and what causes failure should be
clearly defined in the proposal. Alternatively, it can be altered at a later
date with creditors’ agreement.
Does a voluntary arrangement protect a debtor from future
bankruptcy petitions?
Although creditors may agree to a voluntary arrangement, the debtor is not protected from future bankruptcy petitions. If the debtor fails to abide by the requirements of the arrangement the supervisor or the creditors may petition the Court for a bankruptcy order. In addition the debtor may incur further credit after the implementation of the arrangement. New creditors are not parties to the voluntary arrangement and are therefore entitled to petition for the debtor’s bankruptcy.